CPA ADVANCED LEVEL

ADVANCED AUDITING AND ASSURANCE

WEDNESDAY: 20 August 2025. Morning Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Do NOT write
anything on this paper.

QUESTION ONE
According to International Standard on Auditing (ISA) 550 “Related Parties”, auditors are responsible for identifying,
assessing and responding to the risks of material misstatements that may arise from an entity's failure to appropriately
account for or disclose related party relationships, transactions or balances. This responsibility exists because financial
reporting frameworks establish specific accounting and disclosure requirements for such matters.

Required:
(a) Discuss FIVE audit procedures that an auditor could develop to be relied upon to ascertain the existence of related
parties. (10 marks)

(b) You are the audit manager at Hapa and Pale Associates, a firm of Certified Public Accountants and you are
currently reviewing the audit file of Wasafiri Ltd. for the year ended 30 June 2025. Wasafiri Ltd. is engaged in the
export of raw coffee to the international market.

During the course of the audit, a junior team member identified several repetitive large payments made by the
client to a consulting firm registered in a tax haven. When management was asked to explain the nature and
purpose of these payments, they provided only minimal supporting documentation and offered vague explanations,
merely stating that the payments were for “market research”.

Required:
(i) Identify FIVE red flags that could indicate the risk of money laundering at Wasafiri Ltd. (5 marks)

(ii) As the audit manager responsible for this audit, explain FIVE appropriate steps you might take upon
receiving this information. (5 marks)
(Total: 20 marks)

QUESTION TWO
(a) You are the audit engagement partner of Integrity and Integrity Associate, a firm of Certified Public Accountants.
Your firm has launched an aggressive marketing campaign, which includes online advertisements with the
assertive message: “We guarantee your company will pass any audit with us by your side”.

In a separate matter, one of your audit clients, Tangaza Holdings Ltd., a family-owned telecommunications
company has offered your audit team all-expenses-paid trips to Dubai as a gesture of appreciation for their work
during the audit. However, you are aware that Tangaza Holdings Ltd.’s recent press reports have raised concerns
about possible regulatory violations in the company’s mobile money operations.

Required:
(i) Evaluate THREE ethical implications of the firm's advertising campaign, with reference to the
International Ethics Standards Board for Accountants (IESBA) Code of Ethics and Institute of Public
Accountants of Kenya (ICPAK) guidelines on advertising and publicity. (6 marks)

(ii) Summarise THREE ethical threats arising from the client’s gift offer. (3 marks)

(iii) Recommend THREE appropriate safeguards as a response to the threats identified in (a) (ii) above.
(3 marks)

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(b) You are the audit manager in Summer and Sammer Associates, a firm of Certified Public Accountants, responsible
for planning and executing the group audit of Africom Holdings Ltd. for the year ended 30 June 2025. Africom
Holdings Ltd. is a diversified investment holding company with its headquarter in Nairobi, Kenya, with a broad
portfolio across East Africa and the Indian Ocean region. The company holds controlling interests in three key
subsidiaries located in Uganda, Tanzania and Mauritius. Each of these subsidiaries operates independently,
maintaining separate financial reports and engaging their own external auditors.

Africom Holdings Ltd. is listed on the Nairobi Securities Exchange and as such, its consolidated financial
statements are prepared in accordance with International Financial Reporting Standards (IFRS) and are subject to
regulatory oversight by the Capital Markets Authority of Kenya.

Group structure and operations:

1. Tanzanian Subsidiary – Africom Tanzania Ltd.
Operates primarily in the telecom infrastructure sector. It was recently penalised by the Tanzania Foreign
Exchange Licensing Authority for breaching local foreign currency repatriation rules. This fine,
amounting to a significant sum, has not yet been disclosed in the group’s interim financial statements.
The subsidiary is audited by a Tanzanian firm that is part of the Summer and Sammer Associates
Certified Public Accountants international network.
2. Ugandan Subsidiary – Africom Uganda Ltd.
Provides micro-financing and digital payment services to rural communities. The Ugandan component’s
audit is conducted by a local audit firm not affiliated with the Summer and Sammer Associates Certified
Public Accountants international network. You note that during the discussions that the local auditor has
historically had limited experience with group reporting and International Financial Reporting Standards
(IFRS) compliance.
3. Mauritius Subsidiary – Africom Mauritius Ltd.
Functions as the group’s financial investment arm and engages in complex derivative trading, including
foreign exchange options, interest rate swaps and crypto-index futures. The subsidiary has reported
substantial unrealised gains from its derivatives portfolio. The Mauritius operations are subject to
oversight by the Mauritius Financial Services Commission (FSC), with stringent regulations on valuation
methodologies and disclosure requirements.

Required:
Analyse FOUR areas the auditor could consider during the preliminary planning of the Africom Holdings group
audit. (8 marks)
(Total: 20 marks)

QUESTION THREE
(a) Explain THREE differences between “assurance engagements” and “non-assurance engagements”. (6 marks)

(b) The Companies Act, 2015 (Kenya), along with International Standards on Auditing (ISA), governs the preparation
and retention of audit working papers.

With reference to the above statement explain the following:

(i) Use of audit working papers. (2 marks)

(ii) Content of audit working papers. (2 marks)

(iii) Retention of audit working papers. (2 marks)

(iv) Confidentiality and safeguarding of working papers. (2 marks)

(c) You are the audit manager in the audit of Fresh Start Ltd. a manufacturing firm, for the year ended 31 March 2025.
The final audit for the year is almost complete and your team is reviewing the working papers. The audit senior
has raised an issue of a major supplier to the company who fraudulently inflated invoices. This led to a Sh. 200
million overstatement in inventory and payables. Fresh Start Ltd. has sued your audit firm for negligence, breach
of contract and statutory liability, arguing:

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 1. Contractual duty breached:
The auditors failed to detect and report material misstatements despite having an obligation to exercise
professional skills and due care (established in contract via the engagement letter).
2. Negligence: (Tort):
Their duty extends to the company (“third-party” in tort) and failure to detect fraud constitutes
negligence, causing foreseeable financial loss.
3. Statutory Liability under Companies Act:
Civil Liability: Responsible officers (including auditors) risk damages for misuse of position or breach of
trust under Section 206.
Criminal Liability: Under Section 46, making a materially false audit statement with intent to deceive
attracts up to 7 years’ imprisonment.

Required:
Discuss the potential legal liabilities of the auditors in relation to each of the claims by Fresh Start. (6 marks)
(Total: 20 marks)

QUESTION FOUR
(a) You are the audit manager responsible for the audit of Mawega Ltd. a medium-sized technology company that
provides software solutions to businesses for the year ended 31 March 2025. The final audit for the year is almost
complete and you are reviewing the audit working papers. The following matters have been raised by the audit
senior for your attention:

1. Termination of a major client contract

Two weeks after the reporting date, Mawega Ltd.’s largest client (which represents 40% of the
company’s annual revenue) terminated its contract. The client cited significant data protection concerns
as the primary reason for the termination. This client had been a critical source of revenue and the loss
could have a material impact on the company’s financial performance going forward.

Management's position
The company has expressed confidence that the company will recover from this setback by securing new
clients. However, the company has not yet signed any replacement contracts or secured any new business
in the short term.

2. Short-term loan for payroll obligations

After the reporting date, the company obtained a short-term loan of Sh.50 million from a local financial
institution. The loan was intended to meet payroll obligations for the next two months due to cash flow
difficulties. This loan is a temporary measure and the company has expressed that it demonstrates
financial resilience, reinforcing their belief that the company is a going concern.

Management’s position
Management is confident that the loan reflects a temporary challenge and that the company will be able to
stabilize its financial position shortly. However, the company has not presented a detailed plan on how
they intend to address the underlying cash flow issues or repay the loan.

3. Related party transaction

During the audit, a related party transaction was noted where the Chief Executive Officer’s (CEO) private
company leased equipment to Mawega Ltd. at above-market rates. The nature of the related party
relationship was not disclosed in the financial statements and the lease payments appear to be
significantly higher than industry standards for similar equipment.

Management’s position
Management has not provided an explanation for the discrepancy in lease terms and has not made any
disclosures regarding the related party relationship in the financial statements, asserting that the lease
arrangement was made based on mutual agreement with no intention of evading compliance.

Required:
(i) For each of the matters above, evaluate the implications of the post-reporting date events for the auditor’s
assessment of the going concern assumption. (9 marks)

(ii) Determine whether these events require adjustment or disclosure under International Accounting
Standards (IAS) 10, “Events After the Reporting Period”. (3 marks)

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(b) Discuss FOUR effects of the COVID-19 pandemic on the following areas in audit:

(i) Audit quality. (2 marks)

(ii) Fraud risks. (2 marks)

(iii) Remote auditing. (2 marks)

(iv) Role of technology. (2 marks)

(Total: 20 marks)

QUESTION FIVE
(a) Evaluate FIVE considerations that should be included in the preparation of group reporting instructions to
component auditors. (10 marks)

(b) An agreed-upon procedures engagement is a type of engagement where the auditor is not required to provide
assurance. However, certain conditions must be met for the engagement to take place and there is a shared
responsibility regarding the performance and outcomes of the procedures.

Required:
Summarise FIVE conditions and shared responsibilities involved in an agreed-upon procedures engagement,
considering the auditor does not provide assurance. (10 marks)
(Total: 20 marks)
……………………………………………………………………….

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 CPA ADVANCED LEVEL

ADVANCED AUDITING AND ASSURANCE

THURSDAY: 24 April 2025. Morning Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Do NOT write
anything on this paper.

QUESTION ONE
(a) The integration of blockchain technology and data analytics into auditing processes represents a transformative
shift in how audits are conducted, offering a range of benefits from enhanced security to increased efficiency and
transparency.

Required:
Evaluate THREE applications of data analytics and THREE applications of block chain technology in the audit
process. (6 marks)

(b) International Standards on Auditing (ISA) 570 Going Concern, highlights both the auditor’s and the
management’s responsibility with regard to the company’s going concern.

Required:
Contrast the responsibility of the management with that of the auditor in the assessment of the going concern of a
company. (6 marks)

(c) You are the audit manager of Kiki and Kiki Associates, a firm of Certified Public Accountants, responsible for the
audit of ABC Manufacturing Company for the year ended 31 December 2024. The audit work has been completed
and reviewed and the audit report is going to be issued in three days. The following is the summary extract data
from the financial statements:
Sh.
Revenue 150,000,000
Net profit after tax 50,000,000
Total assets 120,000,000

You have just been informed that a resolution has been passed to close one of the factories and relocate the largest
factory in the next 6 months. These changes will lead to lay off of staff and the estimated cost of redundancies is
Sh.30,000,000. The financial statements have not been amended to reflect the changes.

Required:
(i) Comment on the implications of the above changes in the financial statements. (2 marks)

(ii) Describe FOUR further audit procedures that you might need to perform. (4 marks)

(iii) Recommend the actions to be taken by the auditor if the financial statements are not amended.
(2 marks)
(Total: 20 marks)

QUESTION TWO
(a) Summarise SEVEN auditor’s responsibilities with regard to subsequent events. (7 marks)

(b) You are the audit manager responsible for the audit of Zambalau Ltd. For the year ended 31 December 2024. The
final audit for the year is almost complete and you are reviewing the audit working papers. The draft financial
statements recognise profit before tax of Sh.110 million. The following matters have been raised by the audit
senior for your attention.
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1. In January 2025, one of the major customers of Zambalau Ltd. was declared bankrupt. The customer had a
balance of Sh.950,000 which is included in the financial statements under accounts receivable.

2. In December 2024, a case against the company by a competitor, with claims of defamation because of an
advertisement that the company placed in the media, is yet to be determined. The company’s legal lawyers have
estimated the damages that are probable to be Sh.1,000,000.

The following extract from the draft auditor’s report has been given to you for your review:

Basis for opinion and disclaimer of opinion

We have performed our audit based on a materiality level of Sh.15 million. Our audit procedures have proven
conclusively that trade receivables are materially misstated. The finance director of Zambalau Ltd., John Kigen,
has refused to adjust the accounts receivable to write off the uncollectible amount from a significant customer
who has been declared bankrupt. Therefore, in our opinion, the financial statements are materially misstated and
consequently we express a disclaimer of opinion.

Emphasis of the matter paragraph

Zambalau Ltd. has a current legal case with claims of Sh.1,000,000 from a competitor. In our opinion, this amount
should be recognised as a provision of which the financial statements have not provided for.

Required:
(i) In relation to the ongoing legal claim against Zambalau Ltd., recommend FIVE additional audit
procedures that may need to be performed. (5 marks)

(ii) Without redrafting the auditor’s report, critique the proposed auditor’s report for Zambalau Ltd. for the
year ended 31 December 2024. (8 marks)
(Total: 20 marks)

QUESTION THREE
(a) Hinga Auditors is a medium-sized audit firm that has been operating for over 15 years. The firm has a diverse
client base. Kayote Ltd. is a privately owned rapidly growing company based in Kenya with a turnover of over
Sh.50,000,000. Kayote Ltd. has expressed interest in Hinga Auditors to audit their books for the year ended
31 March 2025.

The company’s management is currently considering having either a full audit or limited assurance review of their
financial statements.

Required:
As the audit senior at Hinga auditors:

(i) Analyse THREE differences between an audit of historical financial statements and a limited assurance
review. (6 marks)

(ii) Discuss THREE advantages and THREE disadvantages to Kayote Ltd. of having an audit of their
historical financial statements as opposed to a limited assurance review. (6 marks)

(b) You are the audit manager in John Bosco and Associates, a firm of Certified Public Accountants, responsible for
the audit of Cider hospital for the year ended 31 March 2025. You recently visited the audit team, who are
currently on site performing the field work, to review the work performed and to discuss their progress. During
your visit the audit senior brought forward the following matter for your action.

During the review of medical inventories, which included medicines used in a variety of treatment at the hospital,
it was noted that a number of medicines had passed their recommended use by dates. These were recorded on an
inventory spreadsheet maintained by the financial controller and were easy to spot because they were highlighted
in red. One of the audit team members inspected a sample of the inventories in question and confirmed that their
use by date had expired. The audit team requested to look at the spreadsheet again, but they were denied access.

The following day, the finance director confronted the audit team accusing them of extending their investigation
‘beyond their scope of audit’. He also threatened to remove them from the premises if they continued to ask
questions which were not relevant to the audit of the hospital’s financial statements. Since then, the audit team
was unable to complete their audit of medical inventories. They also noted that the room where the inventories
were previously kept had been emptied.
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 Required:
With reference to the above matter raised by the audit senior, describe:

(i) TWO ethical and professional issues surrounding this matter. (2 marks)

(ii) THREE ways that you could report the non-compliance to the management of Cider hospital. (3 marks)

(iii) The impact of the matter on the financial statements of Cider Hospital. (3 marks)
(Total: 20 marks)

QUESTION FOUR
(a) Describe FIVE areas of focus in an environmental audit. (5 marks)

(b) International Standards on Auditing (ISA) 315 Identifying and Assessing the Risk of Material Misstatements
Through Understanding of The Entity and Its Environment, requires auditors to obtain an understanding of the
entity and its environment, including its internal controls.

Required:
Explain FIVE reasons why obtaining an understanding of the entity and its environment is important for the
auditors. (5 marks)

(c) Joan and Jim Associates, a local audit firm, were the auditors of Dhawabu Bank Ltd. that recently went under
receivership. Dhawabu Bank Ltd. has been sued for negligence by investors who lost up to Sh.40.3 million
through a fake corporate bond issuance programme.

The investors claim that the audit firm failed to verify the bank’s claim that it operated a Sh.17.6 million account
with the Central Bank. However, it turned out that the non-existent bank account played a major role in inflating
the banks financial position, thereby enticing investors to pump Sh.40.3 million into the company through a
corporate bond issuance programme. The investors lost their money.

Required:
Evaluate Joan and Jim Associates’ legal liability in relation to the above claim. (10 marks)
(Total: 20 marks)

QUESTION FIVE
(a) You have just completed the forensic investigation where some funds were stolen from your client. You are now
preparing to present your evidence in court against the identified fraudsters.

Required:
Enumerate THREE rules of evidence you will require to observe in court when representing your client.
(3 marks)

(b) International Standards on Auditing (ISA) 720 provides guidance on the auditor’s responsibilities relating to other
information in documents containing audited financial statements. You are the audit engagement partner in audit
of Afucako Ltd. You have an audit trainee assigned to you, who has read the notes taken at your meeting with the
managing director of Afucako Ltd. The audit trainee is seeking to know from you about the implications of
corporate social responsibility (CSR) expenditure being disclosed as a different figure in the financial statements
compared with other information published in the annual report.

Required:
(i) Explain to the audit trainee THREE responsibilities of the auditor in relation to other information in
documents containing audited financial statements. (3 marks)

(ii) Analyse FOUR actions that the auditor could take if the figure relating to the CSR expenditure figure
disclosed in the financial statements is different from the other information published in the annual report
and the management has not amended this even after the matter having been highlighted to them.
(4 marks)

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(c) You are a senior auditor in the audit of Cashew Ltd., a wholesale company, for the year ended 31 March 2025.
The company intends to determine the quantity and value of each line of inventory at a physical inventory check
to be held on 22 February 2025 and then adjust the movements between 23 February 2024 and 30 December 2024.
The purchases and sales ledgers will be closed. The company has a fast-moving stock, but operates a satisfactory
recording system which incorporates goods inwards and dispatch records.

Required:
Describe FIVE audit procedures that you would adopt to satisfy yourself that the company’s cut off discipline is
adequate. (10 marks)
(Total: 20 marks)
……………………………………………………………………….

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 CPA ADVANCED LEVEL

ADVANCED AUDITING AND ASSURANCE

WEDNESDAY: 4 December 2024. Morning Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Do NOT write
anything on this paper.

QUESTION ONE
(a) You are the Audit Manager of Daud and Daud Associates, a firm of Certified Public Accountants, responsible for
the audit of Bandia Ltd. The Finance Manager of Bandia Ltd. is suspected of embezzling funds through a complex
scheme of fake invoices and off-the-book transactions. Your firm has been hired by the directors of Bandia Ltd. to
conduct a forensic audit after allegations of financial mismanagement and fraud arose within the organisation.

Required:
(i) Describe TWO types of evidence you would gather in this situation. (4 marks)

(ii) Evaluate THREE potential challenges you might face during the forensic audit. (6 marks)

(b) You are a senior auditor in the audit of Mutaratibu Ltd., a small and medium-sized enterprise. Your client has
approached you to provide assurance on their prospective financial information as they seek to secure additional
financing. However, there are concerns that the forecasts are overly optimistic.

Required:
Discuss FIVE risks associated with providing assurance on prospective financial information. (10 marks)
(Total: 20 marks)

QUESTION TWO
(a) Tech Solutions Ltd. is a mid-sized technology firm that has recently faced scrutiny due to various financial
discrepancies. Cato Emily, the company's Chief Financial Officer (CFO) and a Certified Public Accountant, has
been with Tech Solutions for over ten years. During an external audit, several breaches of the fundamental
principles that professional accountants are expected to uphold were discovered.

1. Cato Emily maintained a close personal relationship with the Chief Executive Officer (CEO), Jack Jones,
which compromised her objectivity in financial decision-making. She approved multiple transactions that
directly benefited Jack Jones, including a lucrative contract awarded to a business owned by Jack’s
sibling, without following proper procurement procedures or disclosures.

2. In a casual conversation with a friend employed at a competing firm, Emily disclosed Tech Solutions
Ltd.’s strategic financial plans, including sensitive information about upcoming product launches and
financial forecasts. This information ultimately leaked, causing considerable harm to Tech Solutions
Ltd.’s competitive advantage.

3. Under pressure from Jack to enhance the company's financial performance prior to a merger negotiation,
Emily directed the accounting team to inflate the revenue figures for the most recent quarter. She also
failed to record certain liabilities, making the statement of financial position appear stronger than it
actually was.

4. As Tech Solutions Ltd. sought to enter new, heavily regulated markets, Emily neglected to pursue the
necessary training or hire external consultants with knowledge of the new regulatory requirements.
Consequently, several regulatory violations occurred, placing the company at risk of fines and legal
actions.

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 Required:
In each of the scenarios above, discuss:
(i) The professional code of ethics violated. (4 marks)
(ii) The ethical issue arising. (4 marks)
(iii) How each of the ethical issues arising may impact the audit. (4 marks)

(b) After completing the audit of Maneno Company Ltd. for the year ended 31 December 2023, the auditor identified
several material misstatements in the financial statements that management has refused to correct. Some of these
misstatements could lead to a qualification of the audit opinion.

Required:
(i) Explain TWO types of audit opinion that the auditor is likely to give in this case. (2 marks)

(ii) Describe SIX ways on how the auditor would communicate the misstatements in his audit report.
(6 marks)
(Total: 20 marks)
QUESTION THREE
(a) Your audit team has identified several significant transactions between the company and its controlling
shareholder. There is concern that these related party transactions have not been appropriately disclosed in the
financial statements.
Required:
Identity SIX potential risks associated with related party transactions. (6 marks)

(b) Describe FOUR benefits that accrue to businesses as a result of applying auditing and assurance services in their
operations as per the provisions of ISA 210. (8 marks)

(c) You are the audit manager responsible for the audit of Helluland Ltd. For the year ended 31 December 2023. The
final audit for the year is nearing completion and you are reviewing the audit working papers. The draft financial
statements recognise total assets of Sh.500 million, revenue of Sh.120 million and profit before tax of Sh.55
million.

Helluland Ltd. owns a number of properties which have been classified as assets held for sale in the statement of
financial position. The notes to the financial statements state that the properties are all due to be sold within one
year. On classification as held for sale, in April 2023, the properties were revalued from carrying value of Sh.45
million to fair value less cost to sell of Sh.40 million, which is the amount recognised in the statement of financial
position at the year end.

Required:
With reference to the above statement, describe THREE matters that you might consider appropriate for
reclassification in respect to the audit of non-current assets held for sale. (6 marks)
(Total: 20 marks)

QUESTION FOUR
(a) You are the audit engagement partner in the audit of Somesha Ltd. An audit trainee assigned to you is keen to
understand how an audit firm can reduce its exposure to claims of negligence and how the auditor can restrict
liability by making a liability limitation agreement with an audit client.
Required:
(i) Discuss THREE negative implications that a liability limitation agreement may have on the auditor or
the client. (6 marks)
(ii) Suggest FOUR strategies that an audit firm may employ in order to reduce exposure to litigation claims.
(8 marks)

(b) You are the audit manager of Jawabu Associates, a firm of Certified Public Accountants. You attended a
professional training seminar in which “Integrated Reporting” featured prominently.

Required:
Summarise SIX principles that underpin the preparation and presentation of an Integrated Report. (6 marks)
(Total: 20 marks)
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QUESTION FIVE
(a) Remote auditing became commonplace activity for audit firms by aid of the proliferation of remote technology
tools during the COVID19 pandemic. Remote auditing has continued to gain momentum and more organisations
may embed it as a new way of working.

Required:
(i) Analyse THREE benefits and THREE challenges of remote auditing. (6 marks)

(ii) Highlight FOUR matters the auditor should consider during the initial planning of remote auditing.
(4 marks)

(b) You are the Audit Manager of Will and Willow Associates, a firm of Certified Public Accountants who are the
auditors of Tamtamu Group of Companies Ltd., for the year ended 30 June 2024. Tamtamu Group of Companies
specialises in production and sale of healthy food products. The group has three subsidiaries namely; Dominion
Delicacies Ltd., Stay Young Ltd. and Pemba Ltd. Your firm audits all components of the group with the exception
of Pemba Ltd. which was acquired during the year.

The year-end is almost complete and the following matters have been raised by the audit senior for your attention:

Tamtamu Group of Companies Ltd.

This is a non-trading parent company, for the period under review, the directors decided to diversify the group’s
activities in order to reduce risk exposure. Non-controlling interests representing long-term investments were
consolidated into two companies. In the consolidated statement of financial position, these investments are
accounted for as associates, as Tamtamu Ltd. is able to exert significant influence over the companies. As part of
their remuneration, the directors of Tamtamu Ltd. receive a bonus based on the profit before tax of the group.
In October 2023, the group finance director resigned from office after a disagreement with the chief executive
officer over changes to accounting estimates. A new group finance director is yet to be appointed.

Dominion Delicacies Ltd.

This company mills, blends, packages and distributes healthy flours and natural spices. During the year ended
30 June 2024, the company built a new processing area, at a total cost of Sh.8 million the amount was considered
material in the context of the company’s financial statements as well as the Group. A loan of Sh.8 million with an
interest rate of 5% per annum had been taken out to finance the construction. The construction took 6 months to
complete and the new processing area was ready for use on 1 February 2024. The processing area started
operating on 1 May 2024. The estimated useful life of the extended factory is 15 years.

Stay Young Ltd.

This company’s operations involve the manufacture and distribution of peanut butter and other bread spreads.
Stay Young Ltd. is involved in a court case with a competitor, Family Foods Ltd., which alleges that a design used
by Stay Young Ltd. copies one of Family Foods Ltd.’s designs which are protected under copyright. A verbal
confirmation from Stay Young Ltd.’s lawyers that a claim of Sh.2.5million has been made against Stay Young
Ltd., which is probable to be paid. Stay Young Ltd. has not made a provision for this.

Pemba Ltd.
This company is a new and significant acquisition purchased in January 2024. It is located in North Africa and has
been purchased to supply peanuts and other ingredients for the goods produced by Stay Young Ltd. It is now
supplying approximately half of the ingredients used in Stay Young Ltd.’s manufacturing. The country in which
Pemba Ltd. is located has not adopted International Financial Reporting Standards (IFRSs), meaning that Pemba
Ltd.’s financial statements are prepared using local accounting rules. The company uses local currency to measure
and present its financial statements.

Pemba Ltd. is audited by a small local firm, Patel and Company Associates. Audit regulations in that country are
not based on International Standards on Auditing.

Required:
Evaluate FIVE audit risks to be considered in your planning of the final audit of the consolidated financial
statements for Tamtamu Group for the year ended 30 June 2024. (10 marks)
(Total: 20 marks)
……………………………………………………………………….

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 CPA ADVANCED LEVEL

ADVANCED AUDITING AND ASSURANCE

WEDNESDAY: 21 August 2024. Morning Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Do NOT write
anything on this paper.

QUESTION ONE
(a) XYZ Auditors is a medium-sized audit firm that has been operating for over 15 years. The firm has a diverse client
base that includes small and micro enterprises, non-profit organisations and publicly listed companies. Recently,
XYZ Auditors experienced the following issues that indicate deficiencies in the quality management system:

1. The firm faced regulatory scrutiny and legal action due to a significant audit failure that involved a publicly
listed client, Beta Ltd. The regulatory scrutiny revealed material misstatements in the financial statements
that were not detected during the audit process.

2. Several cases were reported where auditors had close relationships with key personnel of clients’
organisations, likely comprising the auditors’ independence and objectivity.

3. Meanwhile, many audit staff had not received sufficient training on recent changes in auditing standards
and new regulatory requirements.

4. The firm often struggled with resource allocation, resulting to audit staff being overburdened and rushed
audits, which led to the quality of audits being compromised.

5. Inconsistencies in audit documentation coupled with lack of sufficient audit evidence to support
conclusions reached in several audit engagements was also noted.

The above issues have prompted the firm’s top management to consider implementing International Standard on
Quality Management 1(ISQM1) to enhance their quality management system and address these deficiencies.

Required:
Analyse SIX components of ISQM1 that XYZ Auditors should focus on to address the issues raised to comply
with the standard. (6 marks)

(b) International Standard on Auditing (ISA) 520, “Analytical Procedures”, requires auditors to perform analytical
procedures at various stages of audit risk assessment.

Required:
(i) Explain FIVE objectives of performing analytical procedures as part of audit risk assessment. (5 marks)

(ii) Highlight THREE limitations of performing analytical procedures at the planning stage of the final audit.
(3 marks)

(c) You are a senior auditor in the audit of Bayeti Ltd., a medium-sized company which sells a limited range of
industrial products. While performing reviews on Bayeti Ltd.’s audit files, you have noted that a number of creditors
have withdrawn their financial support to your client and that your client has defaulted on a number of loans. The
working papers conclude that the going concern assumption is inappropriate and recommends that a note explaining
the cash flow challenges your client is facing be included in the financial statements. However, the directors are
reluctant to include the note in the financial statements.

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 Required:
In each case, discuss THREE implications on the audit report if:

(i) The directors refuse to disclose the note. (3 marks)

(ii) The directors agree to disclose the note. (3 marks)

(Total: 20 marks)

QUESTION TWO
(a) Tech Innovators Ltd. is a 2-year-old startup seeking to attract significant venture capital investment. Your firm has
been appointed by Tech Innovators Ltd. to conduct a due diligence investigation. You are the partner responsible for
the audit of Tech Innovators Ltd. The due diligence process involves reviewing the prospective financial
information provided by the client and also a social and environmental audit to assess the company's compliance
with sustainability practices.
Required:
(i) Describe FIVE areas of interest you could consider in evaluating the prospective financial information
relevant while conducting the due diligence process. (5 marks)

(ii) Analyse FIVE factors you might consider while undertaking the social and environmental audit. (5 marks)

(b) You are the Audit Manager of Maharabu and Maharabu Associates, a firm of Certified Public Accountants,
responsible for the audit of Madeni Ltd. You are currently reviewing the working papers of the audit for the year
ended 31 December 2023. While reviewing the working papers on the payroll with the audit junior, he mentioned
the following:
“A number of new employees were hired during the year, with Sh.1.35 million being paid to them. No
documentation is available to show that the board had authorised the hiring of additional members of staff. When I
questioned the payroll supervisor, she mentioned that she made the additions. She said that no authorisation was
required from the board, because the new employees were hired on a temporary basis. Conversely, when making
enquiries about the staffing levels from the management, it was stated that no new employees had been taken on
board for the year under review”.

Other than the tests of controls planned, no other audit work has been performed.

Required:
(i) Explain the meaning of the term "professional skepticism". (2 marks)

(ii) In relation to the audit of Madeni Ltd.’s payroll, recommend FOUR actions that should be taken by the
auditor. (8 marks)
(Total: 20 marks)

QUESTION THREE
(a) You are the Audit Manager of Mateo and Associates, a firm of Certified Public Accountants who are the auditors of
Miradi Group of Companies Ltd. for the year ended 31 December 2023. Miradi Group of Companies Ltd. is a
financial services company. The group has three subsidiaries namely; Kasi Ltd. which provides capital markets
services, Taurus Ltd. which provides brokerage, investment and wealth management services and Gold Crowns Ltd.
which undertakes asset management and other related services. The year-end is almost complete and the following
matters have been raised by the audit senior for your attention:

1. Kasi Ltd. is experiencing going concern problems as noted during this year’s audit. Unless it secures the
prospected loan from the bank to finance a contract already won, Kasi Ltd. will be unable to continue in
operation in the foreseeable future. No disclosure of the going concern problems have been made.

The audit senior has suggested that, due to the seriousness of the situation, the audit opinion should be
qualified ‘except for’.

2. Taurus Ltd. has changed its accounting policy on buildings from cost model to revaluation model.
No disclosure of this change has been given in the financial statements. The carrying amount of the
premises in the statement of financial position as at 31 December 2023 is the same as at
31 December 2022. The buildings figure is material in the context of the financial statements. The audit
senior is satisfied with the carrying value of the buildings in the statement of financial position.

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 The audit senior has concluded that a qualification is not required but suggests that attention can be drawn
to the change in accounting policy by way of an emphasis of matter paragraph.

3. The directors’ report of Gold Crowns Ltd. states that the company’s revenues have grown from 1.2 % to
4% in the last one year. However, analytical review procedures revealed that revenues had only grown by
1.65 %. The audit senior is satisfied that the revenue figures are correct.

The audit senior has noted that an unmodified opinion should be given as the audit opinion does not extend
to the directors’ report.

Required:
For each case mentioned above:

(i) Comment on the appropriateness or otherwise of the audit senior’s proposals regarding the auditors’
reports. (3 marks)

(ii) Where you disagree, indicate what audit modification (if any) should be given instead. (6 marks)

(b) You are the audit engagement partner in the audit of Alina Ltd. An audit trainee assigned to you is considering
ending his internship programme after he learnt that auditors are potentially liable for both criminal and civil
offences in the conduct of an audit.

Required:
(i) Citing relevant examples in each case, distinguish between auditors “criminal liability” and “civil liability”.
(6 marks)

(ii) Highlight FOUR conditions that the company must prove under criminal liability in order to succeed
against the auditor in damages. (5 marks)
(Total: 20 marks)

QUESTION FOUR
(a) Auditor independence is part of the foundation of the auditing profession. An independent, reliable and ethically
sound audit gives a company credibility and allows the public to trust in the accuracy of the results and the integrity
of the accounting profession.

With reference to the Institute of Certified Public Accountants of Kenya (ICPAK) ethical guidelines, justify FIVE
reasons why professional independence is considered important to the auditor. (5 marks)

(b) You are a senior auditor in the audit of Jasiri Ltd., a medium sized manufacturing company. The audit of the
financial statements for the year ended 30 June 2024 is almost complete and you are reviewing the audit files for the
period. The following issues have prompted the senior auditor to call for a meeting with the client’s top management
to be held in a weeks’ time:

1. There were questions concerning the accuracy of the depreciation charged in the financial statements and a
preliminary investigation revealed that the computerised accounting system had failed to compute
depreciation of equipment correctly resulting to an overstatement of the depreciation value by Sh.780,975.
The book value of the equipment had been overstated by Sh.1,128,340. The equipment value for the year
ended 30 June 2024 was Sh.7,135,725.

2. At the beginning of the year 2024, the company had issued a loan to Sarah Hagoi, one of the members of
the top management, amounting to Sh.500,000. On further examination of the records, it was discovered
that the loan had not been disclosed in the financial statements because it was considered immaterial.

3. During the year ended 30 June 2024, the company made a reduction on its provision for customer
warranties recognised in the financial statements. During the past two years, the provision has been made at
the rate of 10% of sales for three months. The management has however decided to reduce it to 5% on the
claims that the quality assurance processes had improved and therefore customer warranty claims were
likely to reduce. Further investigations however revealed that warranty claims have by far remained the
same as in previous periods.

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 Required:
(i) Discuss how the auditor would be expected to treat each scenario mentioned above for the purpose of
reporting. (9 marks)

(ii) Propose how you would treat each scenario mentioned above in the auditors report assuming the
management of Jasiri Ltd. does not correct the misstatements. (6 marks)
(Total: 20 marks)

QUESTION FIVE
(a) Discuss the audit supervisor’s responsibilities in relation to supervision of the audit assistants work during the audit
of financial statements. (4 marks)

(b) In the context of audit assurance engagements, describe how “attestation engagements” differ from “direct reporting
engagements”. (4 marks)

(c) Artificial intelligence (AI) is often described as ‘an evolving technology’ that is equipping computer systems with
something akin to human intelligence.

Required:
With reference to the above statement, argue TWO cases for and TWO cases against the use of artificial
intelligence in the audit practice. (4 marks)

(d) Evaluate FOUR differences between “forensic audit” and “historical audit” of financial statements. (8 marks)
(Total: 20 marks)
……………………………………………………………………….

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 CPA ADVANCED LEVEL

ADVANCED AUDITING AND ASSURANCE

WEDNESDAY: 24 April 2024. Morning Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Do NOT write anything on
this paper.

QUESTION ONE
(a) You are the audit manager of Gabriel and Moses Associates, a firm of Certified Public Accountants, responsible
for the audit of Saforer Ltd. The draft financial statements reported a profit of Sh.13,000,000 for the year ended
31 December 2023. The audit for the year-end is almost complete and the following matters have been raised by
the audit senior for your attention:

1. On 2 November 2023, a major customer went into receivership. The balance owing from the customer
was Sh.2,800,000 as at 31 December 2023. This amount has been included in the accounts receivable
figure in the year-end financial statements.
2. A former employee sued Saforer Ltd. for unfair dismissal during the month of December 2023. The
company’s lawyers estimate that damages amounting to Sh.65,000 are probably payable. A note has been
included under the notes to the accounts describing the legal claim and the estimated damages. However,
no adjustment has been made to the financial statements to recognise the probable loss.

After discussing the above matters with the management of Saforer Ltd, the managers decided not to adjust their
financial statements. The audit senior then drafted the audit report. The following is an extract of the audit report:

Basis for opinion and disclaimer of opinion

We have performed our audit based on a materiality level of Sh.1,650,000. Our audit procedures have confirmed
conclusively that trade receivables are materially misstated. The Finance Director, Philip Majuto, has refused to
make an adjustment to write off a material trade receivable balance. Therefore, in our opinion, the financial
statements of Saforer Ltd. are materially misstated and we therefore express a disclaimer of opinion.

Emphasis of matter paragraph

Saforer Ltd. is facing a legal claim for Sh.65,000 from a former employee. In our opinion this amount should be
recognised as a provision in the financial statements of which this has not been done. We draw our attention to this
breach of International Financial Reporting Standards (IFRSs).

Required:
Using the proposed audit report extract for the year ended 31 December 2023, evaluate FIVE matters that are not
correctly presented in the report. (10 marks)

(b) You are an audit manager in Koki and Kioko Associates, a firm of Certified Public Accountants with five offices
and 14 partners. 70% of the clients of Koki and Kioko Associates are audit clients and 30% are clients that Koki
and Kioko provides with taxation services, accounting services and business advisory services. The firm is
exploring ways of expanding business to boost its revenue. The business development manager at Koki and Kioko
Associates has come up with the following two proposals to increase brand visibility and attract new clients:

(i) An advertisement can be placed in two National Newspapers to attract new clients. The draft
advertisement given to you reads “Koki and Kioko Associates is the largest and the most professional
accountancy and audit services provider in the country. We offer a wide range of services in addition to
audit which are guaranteed to improve your business efficiency and save on tax. If you are dissatisfied
with your auditor, we can offer a second opinion on the report that has been issued. For all new clients we
have an introductory offer of 30% discount when both audit and other services are provided. Our rates are
approved by the Institute of Certified Public Accountants of Kenya (ICPAK)”.
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 (ii) A new experienced partner in the banking sector has joined Koki and Kioko Associates. The business
development manager has proposed that the partner should specialise in offering corporate finance
services to clients. Specifically, the partner should advise the clients on how to raise finance through debt
and would negotiate with the client’s bank or the finance provider on behalf of the client. The fee charged
for this service will depend on the client obtaining finance.
Required:
For each of the proposals given by the business development manager, advise the partners at Koki and Kioko
Associates on FIVE potential ethical and professional issues that could arise. (10 marks)
(Total: 20 marks)
QUESTION TWO
(a) Explain THREE steps in the process of conducting a forensic audit. (6 marks)

(b) Describe EIGHT matters highlighted by International Standard on Auditing (ISA) 210 to which an audit
engagement letter might make reference. (8 marks)
(c) According to International Standard on Auditing (ISA) 550, “Related Parties”, certain relationships, such as parent
and subsidiary, investor and investee may be clearly evident. However, determining the existence of other related
party relationships requires the application of specific audit procedures. The auditor could also devise detailed
procedures intended to provide guidance for identifying material transactions with parties known to be related and
for identifying material transactions that may be indicative of the existence of previously undetermined
relationships.
Required:
Suggest SIX audit procedures that could be relied upon to ascertain the existence of related parties. (6 marks)
(Total: 20 marks)
QUESTION THREE
(a) Thermotech Boilers is an engineering company specialising in designing, fabricating, supplying, installing and
servicing of boilers, incinerators and steam systems. The company has eight production plants in different parts of
the country. The production process is capital intensive and requires a broad range of plant and equipment.
The finance director is responsible for the preparation of a detailed annual budget for property, plant and
equipment (PPE) which is based on a five-year budget and approved by the board of directors after consultation
with the audit committee. Once the budget is approved by the board it is held in a computer file, which is the basis
of any purchase order. When equipment is delivered to the company, a pre-numbered goods received note (GRN)
is raised and a copy is sent to the accounting and finance department. This note is used to update the PPE budget
to reflect the movement. The equipment is carefully inspected by the production personnel and tested if operating
properly. An operational certificate is prepared by the production department and is used by the accounting and
finance department together with the GRN to check against the purchase invoice when it is received. At the same
time as the purchase invoice enters the purchases system, the computerised PPE register is updated. Access to the
PPE register is restricted to the personnel in the accounting and finance department. On a regular basis throughout
the year, the PPE register is compared to plant and equipment on site by the accounting personnel using
identification numbers in the register and permanently marked on to each item in the factory. The internal audit
department also tests on a sample basis the operation of the system from the budget preparation to entry in the PPE
register. Internal audit staff also compare a sample of entries in the PPE register with the equipment in the
factories.
As part of your work as external auditors, you have reviewed the PPE audit programme of the internal auditors and
come to the conclusion that the basis of their testing is a representative sample of purchases invoices.
Required:
(i) Identify THREE strengths in Thermotech Boilers control environment in the area of PPE and explain
how each of the strengths reduces the control risk. (6 marks)
(ii) Citing FOUR reasons, explain why testing of a representative sample of purchases invoices to prove
completeness of PPE records is not sufficient. (4 marks)

(b) When auditing consolidated financial statements, the auditor pays close attention to accounting policies as they
have a significant impact on the presentation and disclosure of financial information.
Required:
Discuss FIVE areas of interest by an auditor in relation to the accounting policies related to consolidated financial
statements. (10 marks)
(Total: 20 marks)
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QUESTION FOUR
(a) You are the audit engagement partner in the audit of Cologne Ltd. You have an audit trainee assigned to you who
has read the notes taken at your meeting with the managing director of Cologne Ltd. The audit trainee is seeking
to know from you the implications of corporate social responsibility (CSR) expenditure being disclosed as a
different figure in the financial statements compared with other information published in the annual report.

Required:
Describe FOUR actions that the auditor could take if the figure relating to the CSR expenditure disclosed in the
financial statements is different from the other information published in the annual report and the management has
not amended this even after the matter having been highlighted to them. (4 marks)

(b) Discuss FIVE factors that might have led to increased litigation against auditors. (10 marks)

(c) International Standard on Auditing (ISA) 570, “Going Concern”, provides examples of events that individually or
collectively might cast significant doubt on the going concern assumption.

Required:
Summarise SIX events that individually or collectively might cast significant doubt on the going concern of an
organisation. (6 marks)
(Total: 20 marks)

QUESTION FIVE
(a) The anti-money laundering responsibility of accountants has become more significant in recent years. This is due
to increased organised crime activities, making it necessary for governments around the world to initiate and
implement actions aimed at preventing money laundering activities.

Required:
(i) Explain the term “money laundering”. (2 marks)

(ii) Using illustrations, describe FOUR money laundering offences, including those which could be
committed by an accountant. (4 marks)

(b) Bizmogul Ltd., a manufacturer of tyres, is an audit client of Weste and Associates, a firm of Certified Public
Accountants. The financial year of Bizmogul Ltd. ended on 30 June 2023. The audit report and the financial
statements were to be signed on 14 September 2023. The following additional information on two material events
were brought to the attention of the auditor:

Event 1 – Occurred on 15 July 2023

A new type of tyre innovated by Bizmogul was found to be defective and hence unsafe for use. No sales had been
made as the product was scheduled to be launched towards the end of September 2023. The company had an
insurance cover for inventories. The affected inventory was estimated to be worth Sh.1,500,000 and was included
in the finished goods as at 30 June 2023. The insurers estimated the affected inventory to be worth Sh.500,000.
The insurance company did not want to pay for the loss in the value of inventory as the company’s inventory was
under insured.

Event 2 – Occurred on 8 August 2023

The equipment used for vulcanisation of rubber got damaged. Leakage of harmful gas into the atmosphere
occurred. The environmental agency is investigating the extent of the emission and the breach of environmental
legislation arising thereof.

Required:
For each of the events, Event 1 and Event 2:

(i) Explain whether the event is adjusting or non-adjusting according to International Accounting Standard
(IAS) 10, “Events after the Reporting Period”. (4 marks)

(ii) Discuss the auditor’s responsibility and the audit procedures that should be carried out. (6 marks)

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(iii) Assume that the date is 30 September 2023, and the financial statements and the audit report have been
signed. The annual general meeting is to take place on 25 October 2023. The environmental agency has
issued a report stating that Bizmogul Ltd. is in breach of environment regulations and a fine of
Sh.2,000,000 will be imposed on the company. The amount is material to the financial statements.

Required:
Discuss FOUR additional audit procedures that might need to be performed with respect to the fine.
(4 marks)
(Total: 20 marks)
……………………………………………………………………….

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 CPA ADVANCED LEVEL

ADVANCED AUDITING AND ASSURANCE

WEDNESDAY: 6 December 2023. Morning Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Do NOT write anything on
this paper.

QUESTION ONE
(a) You are the Audit Manager of Baraka and Company LLP, who are the auditors of Miradi Ltd. for the year ended
30 June 2023. The company has net assets of Sh.150 million. The audit has been completed but there is a matter
that has not yet been resolved on depreciation of buildings. The directors of Miradi Ltd. have resolved that
depreciation on buildings will not be provided for in the financial statements. The buildings were acquired in the
year 2020 and no depreciation has been provided since.

Required:
(i) Describe SIX additional audit procedures and actions that you could take with respect to the above matter.
(6 marks)
(ii) Assume that, according to your workings, the depreciation charge on the buildings for the year ended
30 June 2023 should be Sh.4,200,000 based on the straight line method of depreciation at an annual rate
of 5%.

Required:
Discuss the implications of the above on the financial statements, clearly indicating its effect on the audit
report. (8 marks)

(b) Explain SIX audit risks associated with the audit of financial instruments. (6 marks)
(Total: 20 marks)

QUESTION TWO
(a) The following is an extract from a speech presented in a recent professional forum:

“In the private sector, going concern is an area of interest to users of financial statements. Shareholders and lenders
wish to know that a business will continue into the foreseeable future before they can make investment or lending
decisions.

The going concern concept in the public sector differs from that in the private sector. This is because most public
bodies, whether government departments, devolved administrations, local public bodies or national funds have a
statutory existence that makes technical insolvency almost impossible.

Despite that, stakeholders in the public sector still have an interest in knowing whether these institutions are
financially sustainable.”

Required:
In the context of the above statement, discuss EIGHT factors that an auditor would consider in determining the
going concern assumption of a public entity. (8 marks)

(b) Describe FOUR procedures that an auditor might perform to identify subsequent events occurring after the
financial year end in a company. (4 marks)

(c) Your audit firm, KKCO LLP, has been the auditor of Express Ltd., a leading online retailer that was established a
few years ago. At inception, the company had an average delivery time of a week, but has since grown to an
average delivery time of between one and five days. The company started with three employees and has grown to
1,000 employees including a 150 customer service team who are available 7 days a week.
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 It has emerged that an employee stole Sh.20 million by manipulating vendor payment records pointing to the risk
of fraud facing their trading platforms.

Required:
Prepare a proposal to the directors of Express Ltd. explaining:

(i) The need for an internal audit function in the company. (4 marks)

(ii) The benefits of outsourcing the internal audit function. (4 marks)

(Total: 20 marks)

QUESTION THREE
(a) Compumax Ltd. is one of your audit clients for the year ended 30 June 2023. The company has followed generally
accepted accounting principles and had a conservative approach to recognising revenue from its software
application sales. Revenue was recognised only when the product was delivered to the customer.

Due to increased competition leading to a declining market share, the Chief Executive Officer (CEO) of the
company has put pressure on the Chief Finance Officer (CFO) to find ways to improve the company’s financial
performance and boost revenue numbers. In reacting to the pressure, the CFO decided that the new policy will be
that revenue from software application sales could be recognised as soon as the contract was signed, regardless of
the product’s actual delivery to the customer. The CFO did not disclose the change in policy. With the new policy,
the company started recognising revenue from software application sales immediately after contract signing,
artificially inflating the company’s revenue figures. This allowed the company to present a more favourable
financial status, potentially increasing the share price and attracting new investors.

Required:
With reference to the above scenario:

(i) Describe THREE circumstances under which a change in accounting policy is permissible. (3 marks)

(ii) Summarise THREE disclosures that could be made in the financial statements regarding the change in
accounting policy. (3 marks)

(iii) Discuss FIVE audit procedures that are necessary where an entity has changed an accounting policy.
(10 marks)

(b) The question on whether a change constitutes a change in policy or a change in estimate has been a major source of
discussion among accountants and auditors.

Required:
Distinguish between a “change in accounting estimate” and a “change in accounting policy”. (4 marks)
(Total: 20 marks)

QUESTION FOUR
(a) During the audit of the financial statements of WX Company Ltd. for the year ended 31 December 2022, the
auditors realised that new information that had not been accounted for when the management prepared the financial
statements had come to their notice as follows:

1. A court case in which a customer had sued the company for goods that got lost in transit from one of the
company’s stores was decided against the company. Although the company had made a provision for a
refund of the deposit paid on the goods, the court also awarded the customer the costs of the suit and
general damages. The total amount payable now exceeds the provision.
2. A customer who owed the company a substantial amount of money and had been having problems paying
has had to close business after his bank, from which he had obtained a loan, petitioned for liquidation of
the business. Although he had invested the bank loan in a building project, the building had stalled before
completion. The materials purchased from WX Ltd. had already been used in the project which the bank
has attached as a collateral for their loan. WX Ltd. may never be paid the balance on this account.
3. Due to the rapid fluctuations in the foreign exchange rate, the directors feel that some of the inventory
purchased earlier would not be replaceable if sold on the basis of their initial import cost and have
suggested a revaluation of the inventory as a way of safeguarding the business from possible losses.

Required:
In each of the situations explained above, discuss the auditor’s advice to the management of WX Company Ltd. in
order to minimise the risk of material misstatement resulting from these events. (6 marks)

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(b) In conducting the audit of historical financial statements, the auditor’s objective is to obtain sufficient appropriate
audit evidence on which he forms an opinion about the financial statements as a whole and report that opinion to
the shareholders.

Required:
Describe the auditor’s objectives when undertaking:

(i) An examination of prospective financial information. (3 marks)

(ii) A financial due diligence assignment. (3 marks)

(c) To succeed in business in the modern world, every company must consider investing in some form of Information
Technology (IT). The companies that do not have their own systems still have to protect themselves from cyber
criminals whenever they use computer systems even for simple communication within and without the
organisation. To ensure the security of this computerised information, companies have had to invest in controls that
ensure protection and integrity of their data. IT general controls are the most common controls because they are
capable of preventing data theft, stop unauthorised access, reduce operational disruption and stop data breaches.

Required:
(i) Explain how the IT general controls protect the company and its information systems from risk. (4 marks)

(ii) Explain the best practice for implementing IT general controls. (4 marks)
(Total: 20 marks)

QUESTION FIVE
(a) Solar Power Limited (SPL), an international company, sells solar panels subject to a warranty of one year.
Included in the statement of financial position of SPL is a warranty provision of Sh.100,000,000. The director who
owns 70% of the shares in the company is the one who estimates the cost of repairing defective solar panels
reported by dissatisfied customers. The estimate from the director forms the basis of the provision.

This is your first audit of SPL whose turnover in the previous year was Sh.10 billion compared to Sh.15 billion this
year.

Required:
Explain the audit procedures that you would perform during the year in respect to the estimated warranty provision
included in the statement of financial position for the current year. (8 marks)

(b) (i) Explain TWO challenges that a small audit firm might face in implementing quality control procedures,
recommending a measure that could be taken to overcome each challenge. (4 marks)

(ii) Describe FOUR quality control procedures that are applicable to an audit engagement. (8 marks)
(Total: 20 marks)
……………………………………………………………………….

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 CPA ADVANCED LEVEL

ADVANCED AUDITING AND ASSURANCE

WEDNESDAY: 23 August 2023. Morning Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Do NOT write anything on
this paper.

QUESTION ONE
(a) CMP Ltd. is a production company that employs fifty workers. The company has the following payroll procedures:
1. The factory foreman interviews applicants and on the basis of the interview either hires or rejects them.
When applicants are hired, they fill in an employees withholding exemption certificate (W-4 form) and
forward it to the foreman. The foreman indicates the hourly rate of pay for the new employee in the W-4
form and then forwards it to a payroll clerk as notice that the worker has been employed. The foreman
verbally advises the payroll department of any adjustments to the hourly rate of pay.
2. A supply of blank time cards is kept in a box near the entrance to the factory. Each worker takes a time
card on Monday morning, fills in his name and notes in pencil their daily arrival and departure times. At
the end of the week, the workers drop the time cards in a box near the factory door.
3. Each Monday morning, the completed time cards are taken from the box by a payroll clerk. One of the
payroll clerks then records the payroll transactions using a computer system which captures all
information for the payroll journal as calculated by the clerk and automatically updates the employees
earnings records and general ledger. Employees are automatically removed from the payroll when they
fail to return in a time card.
4. The payroll cheques are manually signed by the chief accountant and given to the foreman. The foreman
distributes the cheques to the employees and arranges for the delivery of the cheques to those who are
absent. The payroll bank account is reconciled by the chief accountant, who also prepares the various
payroll tax reports.

Required:
Discuss SIX deficiencies in CMP Ltd.’s internal controls with the associated risk for each deficiency. (12 marks)

(b) You are the auditor of Flowermint Ltd., a company engaged in growing and exporting flowers. Assume that when
you arrived at your client’s office on 11 January 2023 to begin the audit for the year ended 31 December 2022, you
discovered that the client had been drawing cheques as the creditors invoices became due but not necessarily
mailing them. Because of a working capital shortage, some cheques may have been held for two or three weeks.

The client informs you that unmailed cheques amounting to Sh.27,600,000 were on hand as at 31 December 2022.
He states that these December 2022 dated cheques had been entered in the cash disbursements book and charged to
the respective creditors accounts in December because the cheques were prenumbered. Heavy sales collections
permitted him to mail the cheques before your arrival.

The client wishes to adjust the cash balance and accounts payable as at 31 December 2022 by Sh.27,600,000
because the cash account had a credit balance. The client is also reluctant to reflect an overdraft in the financial
statements.

Required:
(i) Prepare a detailed audit program indicating the procedures you would use to satisfy yourself of the
accuracy of the cash at bank balances on the client’s financial statements. (5 marks)

(ii) Discuss the propriety or otherwise of reversing the indicated amount of outstanding cheques as at
31 December 2022. (3 marks)
(Total: 20 marks)

CA34S2 Page 1

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QUESTION TWO
(a) An Audit Committee is established by a Board to provide an independent oversight of the organisation’s system of
internal control and financial reporting.

Describe FIVE specific roles and responsibilities of an Audit Committee. (10 marks)

(b) Discuss FIVE types of audit opinions, specifying the circumstances under which each opinion may be ideal.
(10 marks)
(Total: 20 marks)
QUESTION THREE
(a) As an audit practitioner, you have been invited by your local accountancy institute to provide insights to aspiring
accountants on audit engagements, review of financial statements and the distinction between these two
engagements.

In the context of the above, prepare your explanatory notes on the following:

(i) Purpose of review engagements in relation to financial statements. (3 marks)

(ii) THREE features that distinguish review engagements from audit engagements in relation to financial
statements. (6 marks)

(iii) The main focus of reviews on:

• Value for money audits. (3 marks)

• Social and environmental audits. (3 marks)

(b) The following is an extract from a leading journal in auditing:

“The main responsibility of auditors is to report to the members on whether the financial statements of the
company show a ‘true and fair view’ or ‘present fairly’ the financial position. Of course the report should consider
whether management have kept proper accounting records and complied with recognised accounting framework.
Responsibilities also applies when problems happen”.

In the context of the above statement, describe FIVE practical situations in which auditors may be held liable.
(5 marks)
(Total: 20 marks)

QUESTION FOUR
(a) According to the International Federation of Accountants (IFAC):

“Skepticism is not just at the heart of auditing, it is in the heart of most auditors, a fact that is not obvious to
outsiders given the various calls for auditors to exercise more skepticism, particularly when the pressures of
deadlines and budgets are brought to bear and doing the right thing becomes more of a challenge”.

Other experts have gone further to postulate that professional skepticism has three elements; attributes, mindset
and action.

Required:
(i) Explain your understanding of each of the THREE elements of professional skepticism identified above.
(6 marks)

(ii) Describe any THREE auditable areas in which professional skepticism requires to be exercised. (3 marks)

(b) (i) Explain the THREE components of audit risk. (3 marks)

(ii) Analyse FOUR audit risk procedures that you would employ in a high-risk audit, identifying the sources
of information under each procedure. (8 marks)
(Total: 20 marks)

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 QUESTION FIVE
(a) Exlink Commercial Bank is a mid-size bank with a large pool of customers seeking credit. The bank’s credit
activities mainly comprise the following:
1. Origination and disbursement.
2. Monitoring.
3. Collection.

Required:
As the lead auditor of the bank, prepare a checklist of the key internal controls that you would expect under each of
the three functions above. (12 marks)

(b) The Government of your country has recently introduced performance contracting in the public sector with the
objective of improving service delivery to the public. This has been largely achieved by ensuring the top-level
managers are accountable for results and ensuring that resources are focused on attainment of key national policy
priorities of the government.

Your audit firm has recently won a tender to audit the reliability of feedback provided by state corporations on
achievement of performance contracting targets.

Required:
Describe the key audit procedures you would undertake to achieve the above audit objective. (8 marks)
(Total: 20 marks)
……………………………………………………………………….

CA34S2 Page 3
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 CPA ADVANCED LEVEL

ADVANCED AUDITING AND ASSURANCE

WEDNESDAY: 26 April 2023. Morning Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Do NOT write anything on
this paper.

QUESTION ONE
(a) As the partner in charge of the internal quality review and control envisaged by International Standard on Quality
Management (ISQCM) 1, you are required to prepare a brief for training the engagement team in your firm.

Required:
In light of the above statement:
(i) Explain the difference between “assurance” and “non-assurance” services as provided by external
auditors. (4 marks)

(ii) Describe the work of the partner charged with the responsibility of driving the quality agenda in external
audits. (4 marks)

(iii) Discuss FOUR principal tenets of ISQM 1. (4 marks)

(b) Describe the following audits and their relevance in modern audit practice:

(i) Environmental audit. (4 marks)

(ii) Forensic audits. (4 marks)

(Total: 20 marks)

QUESTION TWO
(a) You are responsible for the audit of Spheres Ltd. and are currently reviewing the working papers of the audit for
the year ended 31 December 2022. In the working papers dealing with payroll, the audit junior has commented as
follows:

“A number of new employees have been added to the company’s payroll during the year, with combined payments
of Sh.1.35 million being made to them. There does not appear to be any authorisation for these additions. When I
questioned the payroll supervisor who made the additions, he said that no authorisation was needed because the
new employees were hired on a temporary basis. Conversely, when making enquiries about the staffing levels
from the management, it was stated that no new employees have been taken on this year. Other than the tests of
controls planned, no other audit work has been performed”.

Required:
(i) Explain the meaning of the term “professional skepticism”. (2 marks)

(ii) In relation to the audit of Spheres Ltd.’s payroll, recommend further actions that should be taken by the
auditor. (6 marks)

(b) You are the manager responsible for the audit of four audit clients of M & Associates, a firm of CPAs. The year
end in each case is 31 December 2022. You are currently reviewing the audit working paper files and the audit
seniors’ recommendations for the auditors’ reports.

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of 4
 Required:
For each of the cases below, comment on the appropriateness or otherwise of the proposition of the audit senior
regarding the auditors’ reports. Where you disagree, indicate what audit modification (if any) should be given
instead.

Details are as follows:

1. C Ltd. is experiencing going concern problems as noted during this year’s audit. Unless it secures the
prospected loan from the bank to finance a contract already won, C Ltd. will likely not continue
operating in the foreseeable future. No disclosure of the going concern problems has been made.

The audit senior has suggested that, due to the seriousness of the situation, the audit opinion must at least
be qualified ‘except for’. (4 marks)

2. P Ltd. has changed its accounting policy on premises from cost model to revaluation model. No
disclosure of this change has been given in the financial statements. The carrying amount of the premises
in the statement of financial position as at 31 December 2022 is the same as at 31 December 2021. The
premises figure is material in the context of the financial statements. The audit senior is satisfied with the
carrying value of the premises in the statement of financial position.

The audit senior has concluded that a qualification is not required but suggests that attention should be
drawn to the change by way of an emphasis of matter paragraph. (4 marks)

3. The directors’ report of AC Ltd. states that the company’s revenue has grown from 1.2 % to 4% in the
last one year. However, analytical review procedures showed that revenues had only grown by 1.65%.
The audit senior is satisfied that the revenue figures are correct.

The audit senior has noted that an unmodified opinion should be given as the audit opinion does not
extend to the directors’ report. (4 marks)
(Total: 20 marks)

QUESTION THREE
You are the manager in-charge of the audit of Maridadi Fashions Ltd., a private company dealing in the import and sale of
fashion wear. The company plans to seek a public quotation for its shares and is required to prepare a prospectus which
must incorporate a report by the auditors of the company.

The directors intend to include a profit forecast in the prospectus. You have been approached by the securities exchange to
report on the bases and calculations for the forecast.

Required:
(a) Explain the preliminary considerations that you would take into account before you accept responsibility for
reporting on the profit forecast. (6 marks)

(b) Discuss the specific audit procedures that you would perform to ensure that the profit forecast is not misleading.
(10 marks)
(c) Describe the matters that you would include in your report. (4 marks)
(Total: 20 marks)

QUESTION FOUR
Lavenda Group has been a client of your Audit firm for several years. The group of companies specialises in production
and sale of health food products. You are a senior audit manager responsible for the audit of the Lavenda Group. The group
companies all have a financial year ended 31 December 2022. Your firm audits all components of the group with the
exception of P Ltd. which was acquired during the year.
You are currently planning the final audit of the consolidated financial statements. Information about several matters
relevant to the group audit is given below. These matters are all potentially material to the consolidated financial
statements. None of the companies in the group is listed.

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Lavenda Ltd.
This is a non-trading parent company, which wholly owns three subsidiaries: D Ltd., S Ltd. and P Ltd. all of which are
involved with the core manufacturing and marketing operations of the group. This year, the directors decided to diversify
the group’s activities in order to reduce risk exposure. Non-controlling interests representing long-term investments have
been made in two companies. In the consolidated statement of financial position, these investments are accounted for as
associates, as Lavenda Ltd. is able to exert significant influence over the companies. As part of their remuneration, the
directors of Lavenda Ltd. receive a bonus based on the profit before tax of the group. In April 2022, the group finance
director resigned from office after a disagreement with the chief executive officer over changes to accounting estimates.
A new group finance director is yet to be appointed.

D Ltd.
This company mills, blends, packages and distributes healthy flours and natural spices. During the year, the factory was
extended by the self-construction of a new processing area, at a total cost of Sh.8 million which is material in the context of
the company’s financial statements as well as the Group. A loan of Sh.8 million with an interest rate of 5% per annum had
been taken out to finance the construction. The construction took 6 months to complete and the new processing area was
ready for use on 1 August 2022. The processing area began to be used on 1 November 2022. The estimated useful life of
the extended factory is 15 years.

S Ltd.
This company’s operations involve the manufacture and distribution of peanut butter and other bread spreads. S Ltd. is
involved in a court case with a competitor, F Foods Ltd., which alleges that a design used in S Ltd. printed material copies
one of F Foods Ltd.’s designs which are protected under copyright. A verbal confirmation was made from S Ltd. lawyers
that a claim of Sh.2.5 million has been made against S Ltd., which is probable to be paid. S Ltd. has not made a provision.

P Ltd.
This company is a new and significant acquisition, purchased in June 2022. It is located in North Africa and has been
purchased to supply peanuts and other ingredients for the goods produced by S Ltd. It is now supplying approximately half
of the ingredients used in S Ltd. The country in which P Ltd. is situated has not adopted International Financial Reporting
Standards, meaning that P Ltd.’s financial statements are prepared using local accounting rules. The company uses local
currency to measure and present its financial statements.

P Ltd. is audited by a small local firm, ABC & Co, also based in North Africa. Assume that Audit regulations in that
country are not based on International Standards on Auditing.

Required:
(a) Evaluate the principal audit risks to be considered in your planning of the final audit of the consolidated financial
statements for the year ended 31 December 2022. (6 marks)

(b) Describe the procedures that should be performed in deciding the extent of reliance to be placed on the work of
ABC & Co. (10 marks)

(c) Recommend the principal audit procedures that should be performed on the classification of non-controlling
investments made by Lavenda Ltd. (4 marks)
(Total: 20 marks)

QUESTION FIVE
Your firm is the current auditor of Safi Limited, a renowned wholesale business. You have been asked to carry out audit
checks on the cut off and verifying inventory quantities at the year end.

The company maintains the details of the inventory quantities on its computer. These inventory quantities are updated from
the goods received notes and the sales invoices. The company carries out the inventory count each month when all the fast
moving and high value inventory is counted, and a third of the remaining inventory is counted in rotation so that all the
items are counted at least four times a year. You attended the inventory count on the second Sunday of October 2022 and a
further inventory count on the first Sunday of November 2022.

The company’s year-end was 31 October 2022 and the inventory quantities as at that date as shown by the computer had
been used in the valuation of the inventory. No inventory was counted at the year end.

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 Required:
(a) Describe the principal matters that you should have checked and the matters you should have recorded when you
attended the company’s inventory count on the second Sunday of October 2022. (8 marks)

(b) Explain the checks you will perform in confirming the sales and purchases cut offs have been correctly carried out
at the year end. (4 marks)

(c) Discuss the work you will carry out to check that the book inventory records have been correctly updated from the
inventory count. (4 marks)

(d) Summarise the work you will carry out to satisfy yourself that the inventory quantities used in the relation of the
inventory at the year end is correct. (4 marks)
(Total: 20 marks)
……………………………………………………………………….

CA34S2 Page 4
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 CPA ADVANCED LEVEL

ADVANCED AUDITING AND ASSURANCE

WEDNESDAY: 7 December 2022. Morning Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Do NOT write anything on
this paper.

QUESTION ONE
(a) The role of auditors in non-financial audits is increasingly coming under scrutiny. One such area of interest is in
“green” audits, also referred to as environmental audits. A recent article in a leading accountancy journal
highlighted this fact as below:

“In many jurisdictions, corporate auditors are not under any obligation to report to stakeholders of the entities on
the impact of social and environmental issues. It is therefore important that regulators of the accountancy
profession set prescribed and dedicated standards on social and environmental issues for auditors”.

Noting the above trends, the accountancy regulatory body in your country has engaged you to develop a discussion
paper to guide policy on conduct of environmental audits by auditors.

Required:
Draft a discussion paper focusing on the following, clearly elaborating on each:

(i) FOUR limitations of financial accounting in reflecting the social and environmental impact of
organisations. (4 marks)

(ii) THREE objectives of environmental audits. (3 marks)

(iii) SIX information components that should be disclosed in an environmental status report. (6 marks)

(b) (i) Describe THREE circumstances under which a professional auditor may reveal confidential information
relating to the client. (3 marks)

(ii) “Independence threats” are likely to affect an auditor’s ability to comply with the fundamental principles
of ethics.

Required:
With relevant examples, justify the above statement. (4 marks)
(Total: 20 marks)

QUESTION TWO
(a) During a recent seminar on adapting the audit approach to emerging technological changes, a presenter made the
following statement:

“To ensure a successful audit of internet/mobile banking applications, the audit team must understand the business
environment in which they are operating and the prevailing conditions such as regulatory requirements, business
requirements and stakeholders’ needs. The audit team needs to put together a robust internet/mobile banking and
electronic payment application audit program”.

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 Required:
With reference to the above statement, discuss FOUR areas of the internet/mobile banking applications and
supporting information technology (IT) infrastructure that should be reviewed to confirm the adequacy of controls
and ensure security of the applications. (8 marks)

(b) Analyse FOUR ways in which auditors might reduce the risk of professional liability in their dealings with clients.
(8 marks)
(c) In the context of audit peer reviews:

(i) Distinguish between a “systems review” and an “engagement review”. (2 marks)

(ii) Citing reasons, explain the importance of peer review. (2 marks)

(Total: 20 marks)

QUESTION THREE
Jua Kali Motors Ltd. is a vehicle repair shop founded some years ago by Ms Faulu who owns all of the shares apart from a
qualifying share held by her husband and co-director. She runs the workshop with the help of a foreman, five mechanics and
a clerk cum typist. A quotation is issued for all jobs and about 80% of the work is on insurance accident claims. The
insurance companies require typed, pre-numbered quotations and invoices for insurance work. For the very large claims and
occasionally for smaller claims, the insurance companies bring in their own assessors to inspect the vehicles before
authorising the repairs. Private work procedures are less formal and customers are required to pay before collecting their
vehicles. Small stocks of parts and service material are held, but most parts are ordered as required and accounts maintained
with spare parts suppliers.

Your firm of Certified Public Accountants prepares and audits the accounts and provides tax and other advice to Faulu
Motors.

Required:
(a) Discuss the audit procedures that you would perform to assess the internal controls operations and ultimately the
reliability of financial reports. (10 marks)

(b) (i) Citing FOUR reasons, justify to Ms. Faulu on why her company should continue to engage an auditor
annually for audit of the business. (8 marks)

(ii) Suggest an alternative to a full audit that Jua Kali Motors Ltd. could consider. (2 marks)
(Total: 20 marks)

QUESTION FOUR
Achievers Holdings Ltd. is a non-trading holding company with several subsidiaries within East Africa. The company is
based in Nairobi with investment holdings ranging from 75% to 100% in several subsidiary companies.

You are the audit manager responsible for the audit of the group accounts. One subsidiary company operating in Rwanda is
audited by your firm through a branch office in Kigali. The other subsidiaries in Tanzania and Uganda are audited by other
audit firms based in the respective countries.

Assume that the financial year end of Achievers Holdings Ltd. is 30 June, but the subsidiary companies based in Uganda
and Rwanda are engaged in highly seasonal businesses, and have 31 March as their financial year end. The subsidiary
company in Tanzania was acquired during the year ended 30 June 2022.

Required:
(a) Describe the evidence you would expect to obtain in your review of the audit work undertaken in Rwanda, Uganda
and Tanzania. (8 marks)

(b) Following the completion of the subsidiary companies audits, discuss the matters that you would address in your
review of the consolidated financial statements of Achievers Holdings Ltd. for the year ended 30 June 2022, with
specific focus on:

(i) General issues touching on consolidated accounts. (6 marks)

(ii) Audit issues relating to subsidiaries with different year ends. (3 marks)

(iii) Audit issues relating to the newly acquired subsidiary in Tanzania. (3 marks)
(Total: 20 marks)
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QUESTION FIVE
(a) Describe TWO risks that an auditor could face in the audit of each the following items:

(i) Related party transactions. (2 marks)

(ii) Construction contracts. (2 marks)

(iii) Impairment. (2 marks)

(iv) Contingent liabilities. (2 marks)

(b) You are the auditor of Saidia Development Trust (SDT), a not-for-profit entity supporting charitable activities.
SDT has three major donors one of whom contributes over 80% of the entity’s budget.

The major donor has placed a condition that operating cost must not exceed 10% of the total budget. Funding from
each of the donors is designated and restricted to specific projects. In some instances, donor funds have not been
disbursed in time making it necessary for SDT to seek for bank overdrafts to continue meeting fixed costs and
ongoing projects. The Executive Director has requested you not to mention the loans in the financial statements or
management letter as the donors may raise concerns. Furthermore, the overdraft has been fully repaid by period
end.

Two employees have sued SDT for wrongful dismissal and claimed Sh.10 million. In order to demonstrate to the
courts that SDT does not have money to meet such a claim, Sh.11 million was withdrawn from the entity‘s account
and banked in the Executive Director’s personal account. The director is not ready to give you his bank statement
as he claims it is personal.

In an effort to reflect that SDT is not overly reliant on the major donor, a material amount has been included as
“other income”. This constitutes cash injections by the Executive Director from his own sources. In order to meet
the 10% operating cost requirements, actual operating costs are understated materially by crediting them and
debiting the director’s loan account.
Most expenses are paid by cash even though the SDT’s policy is that amounts beyond Sh.15,000 should be paid by
cheque. To achieve this, two petty cash floats are maintained, one by the receptionist which is subject to stringent
controls and general cash maintained by the Executive Director where no cash count is ever done and no
independent control is exercised.

Required:
Prepare a memorandum to the non-executive directors of SDT detailing issues noted, their implications and how to
correct them. (12 marks)
(Total: 20 marks)
……………………………………………………………………….

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 CPA ADVANCED LEVEL

ADVANCED AUDITING AND ASSURANCE

WEDNESDAY: 3 August 2022. Morning paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Do NOT write anything on
this paper.

QUESTION ONE
The Basel Core Principles for Effective Banking Supervision, “Risk Management Processes” require that banks and
banking groups must have comprehensive risk management processes, including Board and senior management oversight to
identify, evaluate, monitor and control/mitigate all material risks and further to assess their overall capital adequacy in
relation to their risk profile.

Required:
(a) With reference to the above statements, discuss six components of an effective risk management programme for
banks and similar institutions from an audit perspective. (12 marks)

(b) Describe the specific responsibilities of the Board in overseeing an institution’s strategic risk management process.
(8 marks)
(Total: 20 marks)
QUESTION TWO
(a) Radar Ltd. is a large private company that organises conferences, meetings and celebrations for other companies.
The company was set up ten years ago by S and J who are the majority shareholders. The company employs over
300 staff in its 25 offices.

Your firm, XYZ CPA, where you are the Manager - Business Advisory, has been hired to provide internal audit
services to Radar Ltd. In discussing with S, you discover that there is a small audit team headed by W, a recently
qualified accountant. Before heading the internal audit, W was a junior finance manager in the company. Members
of the internal audit team at Radar Ltd. would be redeployed to the finance department once XYZ CPA starts
provision of the internal audit services.

S has briefed you of many instances where management policies were ignored. In addition, J has recently
discovered a fraud in one office whereby an accounts manager was authorising payments of invoices received from
fictitious suppliers, with the payment being channelled to the accounts manager’s personal bank account.

Required:
(i) Evaluate the benefits to Radar Ltd. from outsourcing its internal audit function. (3 marks)

(ii) Explain the potential impact on the external audit of Radar Ltd. if the internal audit function is outsourced.
(3 marks)

(iii) Recommend procedures that could be used by XYZ CPA to quantify any financial loss suffered by Radar
Ltd. due to the above fraud. (3 marks)

(iv) Compare responsibilities of external auditors and of management in relation to the prevention and
detection of fraud. (3 marks)

(v) Assess two benefits and one limitation that may arise from setting up an audit committee in Radar Ltd.
(3 marks)

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(b) You are in charge of the audit of Sawala Ltd. and are planning the audit of financial statements for the year ended
31 December 2021. Sawala Ltd. has suffered decline in sales and profits in the last two years mainly due to loss of
key customers. Many of Sawala Ltd.’s non-current assets are impaired in value and substantial receivables have
been written off in the last six months.

Sawala Ltd’s. management have decided to restructure the business by reducing the manufacturing capacity by
75% and investing in new technology to make operations more efficient and widen the variety of components
produced. Sawala Ltd. has applied for a bank loan to finance the restructuring. Without the loan, Sawala Ltd. is
unlikely to restructure successfully raising doubts on its ability to continue as a going concern.

Your firm has been asked to advise on forecasts and projections that the bank would need to decide on the finance
requested. Management has also requested your firm to attend a meeting with the bank during which the forecasts
would be discussed.

Required:
Advise on ethical and other implications to guide your firm on the request to provide advice on forecasts and attend
the meeting with the bank. (5 marks)
(Total: 20 marks)

QUESTION THREE
(a) Annlisa Keya is the financial controller of a leading church organisation in the country. Recently, the chief cashier
in the church was suspended for misappropriating cash amounting to Sh.2 million over a period of six months.

The church’s Board of Deacons and the Finance Committee are of the view that though Annlisa Keya was not
directly responsible for the loss, she failed by not discovering the fraud in time. They have recommended her
suspension and possible dismissal. There are also worries that, because of the high cash volumes transacted in the
church, the risk of errors and fraud in cash management is significant.

Annlisa has suggested to the Board of Deacons and Finance Committee to engage an independent auditor to carry
out an investigation.

Your audit firm has been invited to a preparatory meeting of the Board of Deacons as the potential auditor for the
assignment.

Required:
(i) Highlight the issues you would raise during this meeting regarding the entire investigation process.
(4 marks)
(ii) Describe the essential principles that you must observe to conduct an effective investigation.
(4 marks)

(iii) Recommend an effective internal control system for cash handled by the church. (4 marks)

(b) Describe the factors to be considered by an auditor in assessing the inherent risk in an organisation. (4 marks)

(c) Explain how audit files are archived and retrieved for a large organisation. (4 marks)
(Total: 20 marks)

QUESTION FOUR
(a) Bandari Furniture Ltd. manufactures a wide range of domestic furniture. The main components of the furniture
items are wood for the frames, foam filing for the cushions and fabric for the covering. The company’s annual
turnover is Sh.700 million while its stock at the end of the year ended 31 December 2021 was Sh.400 million. You
attended the stock take and you were happy with the accuracy of the exercise.

The cost of raw materials and direct labour are calculated using the standard costing system while overheads are
computed from the company’s financial accounting records as a percentage of direct labour cost.

Required:
(i) Describe the audit work that you would perform to check the standard cost per unit of a line of finished
stock. Comment on how accurate this standard cost has to be. (3 marks)

(ii) Explain the work that you would perform to confirm that the variances are being determined correctly.
(3 marks)
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 (iii) Comment on the overheads that you would include in the value of stock and those that you would not
include, citing relevant examples. (2 marks)

(iv) State two variances that you would include and those that you would exclude when adjusting the value of
stock from standard cost to actual cost. (2 marks)

(b) You are the auditor of Zambezi Ltd., a manufacturer of handcrafts. 40% of the sales are exported to a foreign
country. You are about to commence the audit of the accounts for the year ended 31 October 2021. Account
receivables are included in the statement of financial position at the year end net of Sh.3,000,000 debt provision
(5%) at Sh.57 million. In the past audits, there has been a poor response to the trade receivables circularisation and
a decision has been taken not to circularise or circulate them this year. In an attempt to reduce the exposure to the
foreign currency, Zambezi Ltd. sells 50% of the foreign currency trade receivable forwards.

Required:
(i) Explain the substantive procedures that you would perform as an auditor to verify the accuracy of account
receivables. (4 marks)

(ii) Describe the audit tests you would carry out in order to form an opinion on the doubtful debts provision
and the action you would take if you concluded that it was materially misstated. (4 marks)

(iii) State what adjustment, if any, you would make to the foreign currency account receivables on the basis
that they have all been recorded at the actual exchange rate ruling on the date of sale. (2 marks)
(Total: 20 marks)

QUESTION FIVE
(a) Explain each of the following concepts, clearly indicating its impact on the work of auditors:

(i) Environmental audits. (3 marks)

(ii) Social reporting. (3 marks)

(iii) Audit disengagement. (3 marks)

(iv) Value for money audits. (3 marks)

(b) Safari Company Limited is a manufacturing company that was established five years ago. The company has
attained tremendous growth despite the stiff competition from other companies engaged in the manufacture of
similar products. The company’s management is concerned with reducing the harm that may result from fines and
the compensation in case of violation of the environmental laws and regulations. At the same time, to maintain its
market share, the company intends to give support to the community through social responsibility activities.

Required:
You have been appointed to evaluate the environmental aspects and social support of the company.

Describe the audit procedures that you would perform in order to advise accordingly. (8 marks)
(Total: 20 marks)
……………………………………………………………………….

CA34S2 Page 3

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 CPA ADVANCED LEVEL

PILOT PAPER

ADVANCED AUDITING AND ASSURANCE

December 2021. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question.

QUESTION ONE
You are a manager in XYZ and Co., an international firm of auditors with specific responsibility for the quality of
audits. The firm was appointed auditor of Masaku Savings and Credit Cooperative (MSCC) a provider of savings and
credit services to its employees located in all parts of the country. You have just visited the audit team at MSCC head
office. The audit team comprises of the manager and two audit assistants.

MSCC’s draft accounts for the year ended 31 December 2020 are summarised as follows:
Masaku Savings and Credit Co-operative Society Ltd.
Annual report and financial statements for the year ended 31December 2020
Statistical information as at 31 December:

2020 2019
‘000’ ‘000’
Membership - Active 65 62
Dormant 0 0
65 62

Sh.“000” Sh.“000”
Financial
Total assets 11,283,668 10,910,696
Members' deposits 10,301,544 9,528,044
Loans to members 10,692,984 9,540,914
Share capital 116,000 111,000
Total revenue 393,713 843,070
Total interest income 382,113 827,970
Total expenses 116,773 139,674
Current assets 11,279,009 10,904,040
Current liabilities 354,256 758,884
Working capital 10,924,753 10,145,156
Capital employed 10,929,412 10,151,812
Interest rate on members' deposits 267,840 666,964

Employees of the Sacco 521 400

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,
 Key ratios
Liquidity ratio 31.84 14.37
Return on capital employed (2)% 12%
Interest rate on members' deposits 2.6% 7.0%
Dividend rate on members share capital 1% 7%

During your visit, a review of the audit working papers revealed the following:
1. One audit trainee is concerned with the ratios presented and has sought the manager’s guidance with regards to
the implication.
2. On the audit planning checklist, the audit manager has crossed through the analytical procedures section and
written ‘not applicable – new client’. The audit planning checklist has not been signed off as having been
reviewed.
3. The audit manager last visited MSCC’s office when the final audit commenced three weeks ago. The audit
manager has since completed the audit of total assets. The Audit manager spends most of his time working
from the firm’s office and is currently allocated to seven other assignments as well as MSCC’s audit.
4. As at 30 June 2020, trade receivables amounted to Sh.11.3 billion (2019 – Sh.10.2 billion). One of the trainees
has just finished sending out first requests for direct confirmation of customers’ balances as at the end of the
reporting period.
5. The audit trainee is concerned with the growth in loan to members and the response provided for by
management is not satisfactory.

Required:
Identify and comment on the implications of these findings for XYZ and Co. quality control policies and procedures.
(Total: 20 marks)

QUESTION TWO
Your firm has recently been appointed the statutory auditor of Mali Mengi Limited, a large soft drinks company in your
country, for the year ended 31 December 2021. The previous auditors, from whom your firm has received professional
clearance, did not wish to be re-appointed as auditors. The principal activities of the company are the distribution and
retail of soft drinks. All products are imported from suppliers based in USA and delivered to Mombasa central
warehouse. The company has its own retail outlets but also supplies national supermarket chains and small independent
retailers.

Additional information on the company’s operations:

1. Sales
Sales through its own retail outlets are on a cash basis and sales to supermarkets and independent retailers are
on a credit basis.
2. Inventory records management
The company maintains computerised inventory records for inventories held at the distribution centre and
retail outlets. Each sale is recorded and the computer updates the quantity sold and the inventory balance. The
manager at each outlet is responsible for banking the takings on a daily basis.
3. Website Development
During the year, the company engaged consultants to design and implement the company’s new website with
online ordering facilities.
4. Targeted launch date
Under the terms of the contract, the website was scheduled to be operational by the end of October 2021 in
order to take advantage of the high seasonal demand at this time of the year.
5. Failure to launch and legal suit
Due to technical problems, the website was not launched until the end of December 2021. The consultants
have been paid in full for their work. However, the company has commenced legal proceedings for breach of
contract.
6. Increased revenue in presented management accounts
Despite failing to meet its revenue targets in respect of online revenue, the management accounts for the 12
months to 31 December 2021 indicate an increase in revenue of 30 % compared with the same period in 2020.
7. Stocks and receivables
Stocks and receivables balances are significantly higher than the previous year as a result of the increased
level of activity.
8. Proposed expansion
Management is planning to expand the retail activities of the business by opening additional retail outlets in
Uganda, Tanzania and Ethiopia.
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 9. Funding of expansion
It is hoping to fund the expansion with a bank loan and has approached the company’s bankers to provide the
funding. The bankers require the audited financial statements before making a decision.

Management is keen to have the funding in place to progress with the expansion and would like to have the
audit completed by 31 December 2021.

Required
Identify, from the circumstances described above, the key business risks and for each risk:

(a) List the factors which have led you to identify that risk. (10 marks)

(b) Outline the audit work you would perform to address the risk. (10 marks)
(Total: 20 marks)

QUESTION THREE
You are responsible for the audit of Mariba and Co. Club and have found some potential causes of concern that could
indicate fraudulent activity or financial misconduct within the company.

In particular:

1. 52% of the products on sale by Mariba and Co. Club are supplied through one of the major international
companies with a special finance arrangement deal.
2. Bank reconciliations were last done 11 months ago.
3. There has been a big turnover of staff heading the finance docket with 5 persons having been replaced over the
last 6 months.
4. There are huge unreconciled balances in the accounts receivable and payables running into millions of
shillings.
5. The current head of finance has taken sick leave for the last four weeks due to stress.

Required
(a) Comment on the need for ethical guidance for accountants on money laundering. (5 marks)

(b) Explain the difference between fraud and error and how the issues shown here could be categorised as fraud or
error. (6 marks)

(c) Discuss the role of management and the role of the auditor in the prevention and detection of fraud and error.
(3 marks)

(d) Describe what steps you would take to further investigate and then report on the matters referred to above.
(6 marks)
(Total: 20 marks)
QUESTION FOUR
You are the manager in charge of the audit of MNOP Ltd.

The following issues have arisen:

1. A customer is suing the company for Sh.600 million for damage caused to their products in transit. The
company is defending the claim and believes that the products were not the responsibility of the company as
the goods had been delivered to an independent transporter.
2. A balance due from Mronjiwa Ltd. in respect of sub-contract work, of Sh.300 million, has been outstanding
for over six months. Your firm has been asked by the accountant not to write to Mronjiwa Ltd. for direct
confirmation of this amount as the latter company objects to such letters. You have been assured by the
accountant that the relationship between the two companies is good and that the outstanding balance will be
paid.

Required:
For each of the above issues:

(a) State, with reasons, the audit work that you would expect to find in undertaking your review of the audit
working papers for the year ended 31 December 2021. (8 marks)

(b) Draft the relevant sections dealing with these issues of the written representation letter you would wish the
directors to sign. (12 marks)
(Total: 20 marks)
QUESTION FIVE
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As the lead auditor in the audit of XYZ Limited, a company with sole distributorship rights of a new brand of vehicles,
the following issues are raised at the closing meeting with management:

1. The company’s working capital has been negative for the last 3 years and financing of company operations has
been through an overdraft facility.
2. The financing bank is reluctant to extend further credit to the company due to its’ inability and long delays in
servicing the overdraft which has fallen into huge arrears running into Sh.900 million.
3. The supplier of the vehicles is only providing vehicles upon receipt of full payment.
4. Three suppliers have moved to court to have the company put under administration for its’ inability to pay
their debt totalling to Sh.800 million.
5. Senior management staff in finance and human resource have recently quit for reasons they were not willing to
provide.
6. Salaries to staff are in arrears for over five months and staff are demotivated.

Required:
(a) Draft the audit opinion you would give under the circumstances. (5 marks)

(b) What audit risks are evident from the narration above and what further audit procedures would you perform
for each of the issues discussed above. (12 marks)

(c) From the issues identified above, draft a management letter clearly highlighting the issue, implication and
recommendation to management. (3 marks)
(Total: 20 marks)
.....................................................................................................................

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